What Financial Institutions Should Know About FINRA’s 2024 Regulatory Oversight Report

Financial services professionals take note: the Financial Industry Regulatory Authority (FINRA) has released its 2024 Annual Regulatory Oversight Report. Recent years have witnessed rapid advancements in technology, the rise of crypto assets, and a renewed focus on financial crimes, and financial institutions have to understand FINRA’s priorities in this strange new world if they are to proactively adapt their compliance programs and ensure continued compliance.  

The 2024 FINRA Regulatory Oversight Report plays a critical role in promoting transparency, investor protection, market stability, and responsible industry practices, and its findings and recommendations serve as valuable resources for financial institutions, regulators, and investors alike. Read more to gain insight into key findings of the report, as well as an understanding of FINRA regulations and what activities your firm should focus on to stay ahead of compliance requirements.  

What Does the Report Cover? 

The report features twenty-six topics categorized into six key sections: 

• Financial Crimes: Tackling money laundering, fraud, and sanctions violations. 
• Crypto Asset Developments: A new section for 2024, addressing the unique risks and considerations associated with these rapidly evolving assets. 
• Firm Operations: Highlighting best practices for cybersecurity, technology management, and vendor oversight. 
• Communications and Sales: Maintaining compliance in areas like off-channel communications, suitability recommendations, and marketing materials. 
• Market Integrity: Emphasizing fair pricing, manipulative trading prevention, and accurate OTC quotations. 
• Financial Management: Ensuring capital adequacy, managing liquidity risk, and complying with regulatory capital requirements. 

The 2024 report introduces three new topics within the “Market Integrity” section including over-the-counter (OTC) quotations in fixed-income securities, advertised volume, and market access rule.  

The Red Flags: Key Findings from FINRA’s 2024 Report 

Some of the key findings and observations that emerged from FINRA’s extensive oversight activities in the past year include: 

Combating Financial Crimes 

• The report reveals an increase in complex money laundering schemes, often involving shell companies and virtual assets. FINRA highlights concerns that some financial institutions are not performing thorough enough checks on their customers, especially those who hold high-ranking government positions or are close associates of such individuals. This lax due diligence could lead to violations of sanctions. 
• Findings indicate deficiencies in suspicious activity reporting (SAR) practices, including delays in filing, incomplete information, and insufficient justification for non-filing decisions. 

Navigating the Crypto Frontier 

• FINRA emphasizes the need for heightened awareness of crypto-specific risks, such as market manipulation (for example artificially inflating or deflating prices through coordinated buying or selling, spreading false information, or engaging in wash trading by creating fake trading volume), hacking vulnerabilities, and potential regulatory changes. 
• Supervision gaps were identified in firms offering crypto-related services, particularly regarding training, transaction monitoring systems which are often inadequate, and limited oversight of third-party providers.  
• Risk Management Practices were also flagged, particularly a lack of comprehensive risk assessments and weak internal controls which can create openings for fraud, manipulation, or operational failures. 

Strengthening Firm Operations 

• Cybersecurity concerns remain a central focus, with FINRA highlighting inadequate data encryption, limited access controls, and insufficient incident response plans in some firms. 
• Technology management vulnerabilities were observed, including weaknesses in vendor oversight, risk assessments, and change management processes. 
• The report acknowledges the growing impact of AI on compliance and encourages firms to proactively address the evolving challenges and regulatory considerations. 

Prioritizing Communication & Sales Compliance 

• FINRA identified widespread misuse of personal devices and social media for off-channel communications, leading to potential regulatory violations. 
• Suitability concerns – where financial institutions failed to properly assess whether certain investments were suitable for specific clients potentially leading to financial harm – arose, particularly for complex products and high-risk customers. 
• Misleading marketing materials were identified, often lacking proper disclosures and violating relevant regulations such as the Truth in Lending Act (TILA) or FINRA advertising regulations. 

Ensuring Market Integrity 

• The report reveals an increase in manipulative trading practices, such as spoofing (placing fake orders to create a false impression of supply or demand, influencing the market price) and layering (placing several smaller orders at different price levels on one side of the market, influencing the price towards the desired direction), highlighting the need for enhanced surveillance and detection mechanisms. 
• Concerns were raised regarding fair pricing practices, with some firms failing to prevent discriminatory pricing models, i.e. where pricing differences aren’t directly related to the underlying risk and cost of providing the service but purely based on irrelevant personal characteristics such as race or gender. 
• FINRA identified inaccuracies and inconsistencies in over-the-counter (OTC) quotations, prompting them to call for stronger governance and oversight of these types of transactions.  

Maintaining Sound Financial Management 

• FINRA’s report sheds light on concerning gaps in capital adequacy practices across some firms. This means some haven’t secured enough resources to cover potential losses or unexpected obligations, leaving them vulnerable during market fluctuations or unforeseen circumstances.  
• A worrying trend identified by FINRA is the lack of robust liquidity risk management frameworks within some firms. This exposes them to potential financial vulnerabilities, especially during market downturns when selling assets or obtaining funding becomes difficult.  

What to do? Recommendations Emerging From The Report 

Financial institutions are already doing a lot to stay on top of compliance requirements. So what activities does the 2024 FINRA report suggest you should be implementing or improving on?  

Combating Financial Crimes  

FINRA remains laser-focused on safeguarding investors from financial crimes, including money laundering, fraud, and sanctions violations. Areas to focus on include: 

• Red Flags & Due Diligence: Sharpen your awareness of red flags indicative of potential financial crime, such as unusual transactions, complex ownership structures, and inconsistencies in customer information. Strengthen your due diligence procedures to thoroughly verify customer identities and assess potential risks. 
• Suspicious Activity Reporting (SAR): Ensure efficient and accurate SAR filing processes. Regularly train staff on identifying and reporting suspicious activities, complying with all filing requirements. 
• Implement Effective Practices: The report identifies effective practices observed by FINRA, such as utilizing risk-based monitoring systems, conducting independent reviews of SARs, and fostering a culture of compliance within the organization. 

Navigating the Crypto Frontier  

Crypto assets present both opportunities and challenges, and FINRA offers insights for firms contemplating crypto-related activities. Major themes include: 

• Understanding the Risks: Familiarize yourself with the unique risks associated with crypto assets, such as volatility, hacking, and potential market manipulation. 
• Supervision & Training: Establish robust supervision frameworks and comprehensive training programs to equip staff with the knowledge and skills needed to manage crypto-related activities effectively. 
• Disclosures & Transparency: Ensure clear and accurate disclosures to investors regarding the risks and limitations associated with crypto investments. Utilize the SEC and FINRA’s resources and guidance on crypto compliance. 

Strengthening Firm Operations  

From cybersecurity to technology management, maintaining robust operational frameworks has emerged as an urgent priority in the following areas:  

• Cybersecurity: Prioritize comprehensive cybersecurity measures, including data encryption, access controls, and incident response plans. Regularly conduct vulnerability assessments and penetration testing. 
• Technology Management: Implement sound technology governance practices, ensuring proper oversight and risk management of technological systems and vendors. 
• Artificial Intelligence (AI): Stay informed about the potential impact of AI on compliance obligations and proactively address emerging challenges related to its use. 

Prioritizing Communication & Sales Compliance  

Clear and compliant communication is crucial for building trust with investors. Items of note include: 

• Off-Channel Communications: Implement clear policies and procedures governing off-channel communication, including the use of personal devices, social media, and instant messaging apps. 
• Unsuitable Recommendations: Ensure suitability assessments are conducted following all regulatory requirements and best practices. 
• Misleading Marketing: Avoid misleading marketing materials and ensure compliance with relevant rules and regulations governing advertisements and communications. Utilize FINRA’s guidance on marketing and advertising crypto assets. 
• Monitor Communications: Use supervisory technology solutions to monitor communications and identify potential compliance violations. 

Ensuring Market Integrity  

Fair markets are essential for investor confidence. FINRA recommends that firms focus on: 

• Manipulative Trading: Understand and comply with regulations prohibiting manipulative trading practices, such as spoofing, layering, and quote stuffing. 
• Fair Pricing: Implement controls to ensure fair pricing of securities and prevent discriminatory practices. 
• OTC Quotations: Be mindful of FINRA’s focus on OTC quotations and ensure compliance with relevant regulations regarding accuracy and dissemination. 
• Trade Surveillance: Implement robust trade surveillance systems to detect and prevent manipulative trading practices. 

Maintaining Sound Financial Management  

Financial institutions must demonstrate robust financial management practices in the following arenas: 

• Capital Adequacy: Ensure compliance with FINRA’s capital adequacy requirements to maintain sufficient financial resources to meet obligations. 
• Liquidity Risk Management: Implement effective liquidity risk management strategies to mitigate potential cash flow disruptions. 
• Regulatory Capital Compliance: Adhere to all regulatory capital requirements and stay informed about potential changes in regulations. 
• Assess Resilience: Conduct regular stress testing and scenario planning to assess your financial resilience under various market conditions. 

Challenges Facing Compliance Officers 

While FINRA’s 2024 report serves as a valuable roadmap, implementing its recommendations can present various challenges for financial institutions. Some hurdles to anticipate include: 

Resource Constraints 

• Limited budgets and employees: Implementing compliance programs often requires significant investments in technology, training, and people. Smaller institutions may find it challenging to allocate sufficient resources. 
• Attracting and retaining qualified compliance professionals: The demand for skilled compliance professionals exceeds the supply, making it difficult for institutions to recruit and retain top talent. 

Technological Complexity 

• Keeping pace with evolving technology: The rapid advancements in technology demand constant adaptation in cybersecurity, vendor management, and AI integration, putting pressure on IT infrastructure and expertise. 
• Integrating compliance tools and technologies: Seamless integration of various compliance tools can be complex and expensive, potentially leading to data silos and inefficiencies. 

Balancing Innovation and Regulation 

• Adapting to crypto and emerging technologies: Navigating the regulatory uncertainties surrounding crypto assets and other emerging technologies can be challenging, requiring careful balancing of innovation and compliance. 
• Meeting dynamic regulatory requirements: Keeping abreast of constantly evolving regulations and adapting compliance programs accordingly can be a resource-intensive and time-consuming process. 

LeapXpert: A Critical Part of your Compliance Tech Stack  

FINRA’s 2024 report challenges financial institutions to tighten their grip on communications compliance. The rise of “off-channel” communication, via personal devices and unapproved platforms, creates blind spots where regulatory risks lurk. This demands more than just stricter policies; it necessitates powerful communications platforms that bridge the gap between compliance and convenience. 

The LeapXpert Communications Platform provides a secure and efficient way to manage the complex web of digital conversations that are key to your business operations. It maintains a complete record of all conversations between employees and clients, ensuring recordkeeping standards are met. Using a mobile-first approach, LeapXpert allows users to conduct text and voice conversations through clients’ preferred channels, all within a secure and unified environment. Businesses can maintain a comprehensive view and full visibility of employee-customer communication without capturing employees’ private and personal messages.   

The LeapXpert enterprise solution allows financial firms to set rules and requirements for the types and levels of materials that can be sent internally or externally, including specific keywords and phrases. It also offers full audit and monitoring of dashboards, displaying the real-time status of all messages, conversations, and data sent, flagging when conditions and rules have been breached.  

The LeapXpert Communications Platform can also be easily integrated with leading third-party archiving, surveillance, and analytics platforms, making it an essential part of any private fund manager’s compliance tech stack. Book now for a demo.